Yahoo beats reduced expectations, will slash work force

SAN JOSE, Calif. {AP} First the stock price tumbled and advertising revenue sank. Then managers started bailing out.

Now in yet another sign that former dot-com darling Yahoo! Inc. has come crashing to earth, the Internet portal is cutting 12 percent of its work force.

That translates to about 420 of its 3,510 employees, most of whom will be laid off in the next month. The layoffs, the first in Yahoo's seven-year history, were announced Wednesday as the company said first-quarter earnings beat Wall Street's sharply reduced expectations.

With Yahoo seeing its first year-to-year decline in quarterly revenue, the company is streamlining to focus on "essential services," centralizing operations and reducing marketing, chief executive and chairman Tim Koogle said Wednesday.

"Normalcy has returned. In order to increase cash flow, you have to cut costs," said Jordan Rohan, an analyst with Wit Soundview. "This is somewhat foreign to the Internet space, but it's going to be the rule from this point forward."

With Internet advertising revenue drying up, Yahoo posted its second straight net loss  $11.5 million in the first quarter, or 2 cents a share, compared with a profit of $67.6 million, or 11 cents per share, in the comparable period of 2000.

Excluding one-time charges, Yahoo earned $7.6 million in the three-month period ending March 31, or 1 cent per share, beating the break-even results analysts had expected, according to a survey by Thomson Financial/First Call. That forecast was lowered twice in the last three months  first from 13 cents per share and then from 5 cents per share.

Shares rose 83 cents to $16.69 in afternoon trading on the Nasdaq Stock Market, though the company's stock price remains well off its 52-week high of $153.

Revenue was $180.2 million, a 22 percent drop from $230.8 million in the first quarter of last year.

"We think uncertainty and lack of growth may continue to hinder any recovery in the shares," said Fred Moran, head of Internet research at Jefferies & Co. "If we go into an extended slowdown, or advertisers don't become convinced of the effectiveness of Internet advertising, Yahoo can work feverishly to uncover new revenue sources but still take quite a long time until it gets back to last year's revenue figures."

Santa Clara-based Yahoo warned that it would "approximately break even" in the second quarter. Analysts surveyed by Thomson Financial/First Call had been expecting earnings of 1 cent per share. For the full year, Yahoo expects to earn between 2 and 6 cents per share; analysts' consensus forecast had been 6 cents.

Second-quarter revenue is expected to decline slightly or stay flat from the first quarter, but the company will have higher expenses because of its move to a new headquarters in Sunnyvale and rising energy costs, said Susan Decker, chief financial officer.

For the year, sales are now expected to be between $700 million and $775 million, way down from last year's figure of $1.1 billion.

On a positive note, Yahoo expects to increase its fee-based services and reduce advertising to 80 percent of revenue. Ads made up about 90 percent of Yahoo's sales last year.

Koogle said Yahoo had to undertake a "comprehensive operational review" during the first quarter before arriving at "difficult decisions" about the company's future. The layoffs, which will lead to a restructuring charge of $40 to $60 million this quarter, are expected to save the company $7 million to $9 million per quarter.

Yahoo began as a search engine in 1994, but has grown into a full-service information and shopping portal that had 57 million visitors in February, according to Jupiter Media Metrix. Only sites on the AOL-Time Warner Inc. and Microsoft Corp. networks were more popular.

Even so, Yahoo has lost several top executives and is looking for a new CEO to replace Koogle, who said last month he would step aside, though remain as chairman, to broaden the management team. Koogle said he was encouraged by the progress of the CEO search, but would not provide specifics.

"While they give lip service to having a number of interested parties and a desire to move quickly to fill the CEO position, they didn't give any tangible evidence for reason to be confident in that regard," Moran said.

In another high-level departure, Yahoo announced Wednesday that Heather Killen, senior vice president of international operations, is stepping down in June.

Sounding almost wistful about the company's early days, Koogle noted that Yahoo started with an "outrageous" idea by Stanford University graduate students Jerry Yang and David Filo. Koogle said he was optimistic that the company's strong brand and $1.7 billion in cash would help ensure long-term growth.

"The current period we're managing through is challenging, but it is temporary," he said. "We're passionate, focused and nimble, and we're going to continue to make that original dream into a reality."

In an interview, Koogle repeated his traditional assertion that Yahoo has no plans to pursue a merger with a large media company, despite the widespread belief on Wall Street that such a deal will be necessary for long-term survival.

"There's still a lot of competitors for advertising dollars, and Yahoo's competitors now include AOL-Time Warner, Disney, Viacom  much larger entities," said Rohan, of Wit Soundview. "The competitive set makes Yahoo's platform seem somewhat undifferentiated: just another online company."